Lew Issues Debt-Ceiling Warning

Treasury Secretary Expects to Exhaust Emergency Measures by Oct. 17

By

Damian Paletta

Updated Sept. 25, 2013 2:30 p.m. ET

WASHINGTON—The U.S. Treasury Department on Wednesday said it would exhaust emergency measures to avoid falling behind on government obligations no later than Oct. 17 and would be left with $30 billion in cash to run the government, a warning that could hasten fiscal discussions on Capitol Hill.

Treasury Secretary
Jacob Lew
,
in a letter to Congress, said the $30 billion in cash would "be far short of net expenditures on certain days, which can be as high as $60 billion." He called on Congress to raise the nation's borrowing limit immediately to prevent the country from falling behind on its bills.

ENLARGE

U.S. Secretary of the Treasury Jack Lew.
Getty Images

The government hit the debt ceiling in May and has been using emergency measures—such as delaying pension payments—to avoid falling behind on its bills. Once those emergency measures were exhausted on Oct. 17, the government would have to rely on the cash left on hand and incoming revenue to pay bills.

Building on the Treasury announcement, the Congressional Budget Office on Wednesday estimated the government would run out of cash to pay all of its bills between Oct. 22 and Oct. 31.

If the debt ceiling isn't raised, Oct. 17 would mark a big test for the government. That is because the government is scheduled to roll over $120 billion in maturing debt that day. Investor appetite for the bonds could depend on whether it looks like a budget deal is within reach.

The Treasury had previously estimated it would exhaust the emergency measures by "mid-October" and then be left with $50 billion in cash. But it has lowered its cash estimate because tax receipts in recent days have been lower than expected.

Because the government runs a deficit and spends more money than it brings in through revenue, analysts believe it would only be a matter of days, or perhaps weeks, before that cash ran out and triggered what is known as a "technical default" because some payments wouldn't be met.

In the letter, Mr. Lew said Republican proposals to "prioritize" Treasury's payments after this time, such as by making interest payments to bondholders before making other payments, is "simply default by another name."

Several Republicans have said the Treasury could stretch the remaining money longer than it is telling Congress, and they have said policy makers have more time to make a decision, though other Republicans have warned that a delay could backfire if a financial panic ensues.

Mr. Lew's warning comes as Republicans and Democrats are deeply at odds over how to deal with the debt ceiling and a certain path forward doesn't exist. The nation's borrowing limit is currently about $16.7 trillion, and it can only be raised by Congress.

House Republicans plan to try to advance a measure to raise the debt ceiling for one year in exchange for an agreement to delay implementation of the White House's health-care law, changes to Medicare, an overhaul of the tax code and other conservative priorities.

The White House and many Democrats have said there shouldn't be any conditions placed on raising the debt ceiling and have vowed not to negotiate with Republicans on the matter. This has led some lawmakers, analysts and others to wonder whether an agreement can be reached in time.

Moody's Investors Service said Tuesday that if the debt ceiling isn't raised "the perception that the US government could default on debt servicing…could roil financial markets and damage business and consumer confidence." Analysts have speculated it could lead to a spike in interest rates and cause a stock-market plunge, though the severity—and speed—of any impact is uncertain because the country hasn't encountered such a scenario in modern history.

On Wednesday,
Chris Krueger,
a Washington analyst at Guggenheim Partners' Washington Research Group, pegged the odds the debt ceiling isn't raised in time at 40%. Other analysts have started sounding warnings as well. Potomac Research Group said in a note Wednesday morning the risk of the country defaulting on its debt is "still a very low probability, but that probability is not zero." It predicted an agreement would only be reached after financial markets possibly "send a nasty signal."

Credit Suisse predicted this week that the government would run out of cash to pay all of its bills by Oct. 24 and also said financial markets could become much more volatile as soon as Oct. 10 if expectations remained that Capitol Hill wouldn't be able to reach an agreement.

Mr. Lew said Tuesday that market calm on the matter so far "is a bit greater than it should be."

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